New DOL Safe Harbor Proposal Opens Door for Alternative Investments in 401(k)s
After months of anticipation, the Department of Labor (DOL) has issued a proposed rule and safe harbor that could change the way retirement plan fiduciaries evaluate 401(k) investment options. The initial impetus for the rule was to facilitate inclusion of alternative investment options in 401(k) investment lineups—in accordance with President Trump's previously-issued executive order. That said, the DOL was clear that the proposed process-based safe harbor applies to selection of any type of designated investment alternative (DIA)—not only alternative investment options. The proposal identifies six discrete factors that plan fiduciaries must consider when selecting investments to satisfy the safe harbor and reduce litigation risk (the list is not exhaustive, but the DOL stated that these factors are relevant to the vast majority of DIAs). Because many plan sponsors have historically avoided alternative investments in fear of fiduciary litigation, the rule could have a significant impact on investment lineups going forward.
Alternative Assets and ERISA Duties: Background
Trump's 2025 executive order directed the DOL to develop a rule to facilitate the offering of alternative asset investments in 401(k) plans. By way of background, the EO identified several categories of alternative assets as prime opportunities for DC investors: private market investments, real estate, digital assets, commodities, projects financing infrastructure development and lifetime income strategies.
ERISA has never strictly prohibited plan sponsors from offering alternative investments within qualified retirement plans. Trump's executive order was not necessary to permit alternative asset offering. Instead, the stated purpose of the new rule is to reduce regulatory burdens and litigation risk when plans do select alternative investments.
ERISA itself imposes a fiduciary duty of prudence, which essentially requires plan fiduciaries to use the care, skill, prudence and diligence that a prudent person, acting in a like capacity and with familiarity with similar matters, would use under the circumstances. Under a 1979 DOL regulation, the duty is satisfied when the fiduciary gives appropriate consideration to the facts and circumstances that are relevant to the investment option.
The proposed rule provides that when the fiduciary follows a prudent process (i.e., considers the factors enumerated in the new safe harbor), judges should defer to their judgement. The rule further clarifies that fiduciaries have maximum discretion in selecting DIAs of any class—and that when determining whether a fiduciary has satisfied their duty, the relevant inquiry analyzes the process used, not the investment's performance in hindsight.
Safe Harbor Analysis
The safe harbor identifies six factors that fiduciaries must analyze when selecting investments: (1) performance, (2) fees, (3) liquidity, (4) valuation, (5) performance benchmarks and (6) complexity. The DOL was clear that the safe harbor is not designed to favor any type of investment over another. When considering these factors, fiduciaries must continue to consider the reasons that previously made it difficult to include alternative asset investments in the plan's lineup.
In terms of performance, the fiduciary must evaluate a reasonable number of similar investments. The goal is to determine whether the risk-adjusted expected returns of the investment (less fees) further the plan's purpose over a reasonable timeline. The DOL was clear that the fiduciary doesn't have to select the investment with the highest expected returns and that it can be prudent to select lower-risk options with lower-expected returns.
Similarly, the fiduciary doesn't have to choose the option with the lowest fees. The "fees" evaluation requires the fiduciary to evaluate a reasonable number of options and consider whether the fees are reasonable, taking expected returns and other benefits into account.
The liquidity factor requires the fiduciary to consider whether the option offers sufficient liquidity to meet the needs of the plan and participants (i.e., considering hardship distributions, plan loans, etc.). The fiduciary should also ensure that the DIA has adequate measures in place to ensure it is capable of being timely and accurately valued in accordance with the needs of the plan.
Fiduciaries must also ensure that DIAs have adequate benchmarks in place (such as an index, strategy or other comparable) and compare the DIA's risk-adjusted anticipated returns (less fees) to that benchmark. No single benchmark will apply to all DIAs—and it's possible that multiple benchmarks could apply to a single DIA. The DOL also recognizes that new DIA options may not have a traditional benchmark, so the fiduciary should evaluate comparables when evaluating the investment's value proposition.
The complexity element requires the fiduciary to evaluate the investment's complexity and determine whether it has the skills and ability to understand the investment sufficiently. Fiduciaries who lack necessary knowledge or experience have a duty to hire independent professional advisors to assist in the analysis.
Conclusion
The proposal is not intended to mandate inclusion of alternative asset investments in 401(k) plans. The DOL was clear that it intends to provide an asset-neutral, process-based approach that can apply to all fiduciary investment decisions. Comments on the proposal are due by June 1, 2026—and those comments could generate changes in the final rule going forward.